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Income Taxes: A Politically Incorrect View
by
Dr. Judd W. Patton

   Questions swirl around President Bush’s tax cut proposal. Can we afford it?  Is it too big and weighted in favor of the rich? Could it be too small to stimulate the economy and help stave off a recession?

   Two perspectives have emerged on tax cuts:  a social engineering view and a supply-side view. But there’s also a third, limited government view. It may sound politically incorrect and out of place in today’s debate, but it puts things in perspective.

   As a Constitutional purist, I should preface my remarks by contending that the 16th Amendment (authorizing a federal income tax) was a big mistake. It contradicted our founding tax principles and the philosophy of individual equality under the law. Since 1913 when the 16th Amendment was ratified, our Federal tax system “has degenerated”, according to columnist Linda Bowles, “into a despised and noxious instrument of government abuse…a gargantuan, Constitution-busting, bureaucratic monstrosity, beyond repair or redemption.”

The Bush Proposal

   With that off my chest, let’s put the Bush proposal under the microscope, look at it from each of the aforementioned perspectives and see if it makes good economic sense for our country. Given a projected $5.6 trillion revenue surplus of over the next decade (2002 –11), Bush proposes a $1.6 trillion dollar tax cut, with most of the cuts taking effect in the later years. He wants to cut Federal income tax rates (marginal rates) from five brackets (39.6%, 36%, 31%, 28%, 15%) to four brackets (33%, 25%, 15%, and 10%). This step would account for about half of his total tax cut. Most of the remaining $800 billion would come from increasing the child care tax credit from $500 to $1,000, repealing the so-called wealth tax on large estates, reducing the capital gains tax, and eliminating the marriage penalty.

   If enacted, Bush’s income tax reductions would amount to about $21 billion in FY 2002. At the same time, Mr. Bush’s budget proposes $144 billion spending increase for the entire federal budget. This type of  “cutting” is neither good arithmetic nor good sense. Authentic tax cuts must be matched with spending cuts that are deep enough to get our nation back to Constitutional government.

Social Engineering View

   Social engineers and other left leaners see fiscal-policy tax cuts as a means to promote their goal of egalitarianism – a more even and equitable (re)distribution of income. They call Bush’s tax proposal unfair, a “massive giveaway to the rich.” It’s true. The rich do get most of the tax cut benefits under Mr. Bush’s proposal. But according to the IRS, the top 1% of income earners pay more than 33% of the income taxes, and the top 10% pay about 67%, while the bottom 50% pay a mere 4%. It’s nearly impossible to cut income taxes without benefiting the rich.  “It’s their money,” as Mr. Bush correctly proclaims.

   On the other hand, social engineers contend that tax cuts should favor the poor. They buy in to erroneous notions of Keynesian macroeconomics, that consumptive spending and aggregate demand are keys to maintaining a prosperous economy. Therefore Bush’s proposal won’t help a sagging economy, because the rich will just pocket the money. The poor and middle class, supposedly, will spend and consume it.

   This is simply wrong-headed. Saving and capital investment are the real keys to creating wealth and jobs. In the long run, consumption must come from production. Additional consumptive spending, whether through direct government expenditures or induced by tax cuts, won’t cure an ailing economy. Entrepreneurship and capital (savings) are needed to fuel production and create profitable endeavors.

Supply-Side Tax Cut View

   Rather than promoting wealth redistribution, supply-siders call for permanent cuts in marginal tax rates to promote savings, investment, risk-taking, and economic growth. This idea that “incentives matter” was a major component of Reaganomics of the 1980s. And just as the Laffer curve suggested that high tax rates discourage work, savings, private investment and economic expansion, the 25% cut in income tax rates in the early 1980s led, as expected, to more tax revenue.

   Some supply-siders, like U.S. House Majority Leader Dick Armey, even advocate a flat income tax. But most just want large tax cuts and a lessening of the progressivity of the current tax system to stimulate the economy.

   Supply-siders are right to emphasize the Laffer curve and tax incentives. But some do not seem to realize that budget surpluses notwithstanding, tax cuts that are more than offset by additional government outlays will not stimulate the overall economy. Such a policy crowds out private activity, directing resources from private productive purposes to government consumptive uses.

Limited Government View

   The limited government tax cut view begins with the U.S. Constitution. It sees our current tax system as a system of tyranny. Article I, Section 8 of the Constitution states that, “The Congress shall have the power to lay and collect taxes, duties, imposts, and excises to pay the debts and provide for the common defense and general welfare of the United States;” Notice that taxes could only be imposed for three reasons: debt, national defense and general welfare. Clearly a $2 trillion proposed budget for FY 2002 is way beyond the bounds of the 20 powers granted to government in Article I, Section 8.   

   Americans supporting a limited government view not only conclude that the 16th Amendment was a bad idea and should be repealed, but they approach the current tax cut debate unencumbered by the fallacies of Keynesian fine-tuning and soak-the-rich social engineering.

Politically Incorrect Conclusion

            Contrary to popular belief, the “Era of Big Government” is not over. Politicians on both sides of the political aisle seem to have designs on our money and Utopian plans for how to spend current or projected future surpluses. In my view, therefore, the only way President Bush can make tax cuts authentic is to back them with spending cuts.

Dr. Judd Patton
jpatton.bellevue.edu
Associate Professor of Economics at Bellevue University. Founding director of the University’s Entrepreneurial Leadership Center and the founding editor of The Bottom Line newsletter.  Browse his economics web page at: 

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